J.D. Power insights: Bank customers twice as likely to switch banks if fees are charged

Bank of America, Wells Fargo, Chase are among banks that have reduced overdraft fees in part to retain customers. J.D. Power examines this and other customer-centric banking strategies.
Written by Evan Zimmer, Staff Writer

J.D. Power released a retail banking insight on Tuesday (Feb 2) that revealed retail banking customers are twice as likely to switch banks if charged a fee compared to those who haven't. The insight also revealed that vulnerable customers pay overdraft fees at double the rate of healthy customers.

The findings were made in a recent study examining the decision behind large banks reducing overdraft fees and the impacts overdraft fees have on retail banking customers.

The retail banking insight found that 40% of retail bankers are classified as vulnerable -- customers who aren't financially secure and are susceptible to detriment -- with 37% of retail bankers classified as financially healthy. The study also found that 18% of vulnerable customers owed banks money due to overdraft fees during the last three months compared to 4% of healthy customers.

Large banks, including Bank of America, Wells Fargo, and Capital One, have reduced overdraft fees and introduced programs to strengthen the financial literacy of banking customers.

The reduction of overdraft fees and increase in financial transparency and literacy by the banks was in response to vulnerable customers dealing with more fees, a decrease in customer satisfaction due to incurred fees and an increase in digital banking customers. According to the study, 41% of retail bankers are now digital.

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"When we're talking about transparency, I do think technology has driven that. There just isn't a pallet anymore for not having what you need at your fingertips," Jennifer White, a senior consultant in banking and payment intelligence with J.D. Power, told ZDNet in a phone interview. 

While the increase in digital banking customers might be perceived as a generational divide, White said that might not always be the case. Now, it's more about the financial literacy of customers and how comfortable they feel with the way they bank.

Source: J.D. Power

"It really now is about where consumer's feelings of self-sufficiency are, and how comfortable they are to make decisions and make movements when all of their information is transparent to them," White said.

But will the greater emphasis on financial literacy and the reduction of overdraft fees begin to have a better impact on vulnerable customers? While having to pay less in fees will likely help, another expense could take its place.

"I expect within the next few months to start to see a reduction of people paying this specific type of fee. The question becomes, do they end up paying some other kind of fee? I don't know yet," White said.

With Bank of America, Capital One, Chase and Wells Fargo reducing overdraft fees, White says it's very likely that other banks will announce similar changes regardless of size. "I think everyone will reconsider [fees]; they're going to have to at some point because if enough of the big players make a change, then it forces everybody to follow suit," she said.

With large banks reducing fees and introducing many programs to increase customers' financial wellness, it'll be interesting to see the degree to which these changes have on the financial sector. Will credit card late fees be reduced? Will financial institutions add a grace period for mortgage payments before incurring fees, like Wells Fargo's change to overdraft fees? White says it remains to be seen.

"The fees in those instances are often larger, so that gives me pause to wonder, but I'm not sure yet," she said.

The retail banking insight is a culmination of several surveys J.D. Power conducted, including its Financial Health and Advice Program, the Retail Banking Satisfaction Study, the Retail Banking Advice Satisfaction Study and from its monthly pulse study that surveys 4,000 people in the U.S.

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